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TMI Blog1977 (1) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... was taxable. In appeal, the Appellate Assistant Commissioner took the view that only the income which was taxable to income-tax could be allocated and that only 40% of the salary and interest had to be considered while allocating the profits of the firm among the partners. The Appellate Tribunal followed the Full Bench decision of the Madras High Court in R. M. Chidambaram Pillai Commissioner of Income-tax [1970] 77 ITR 494 and agreed with the Appellate Assistant Commissioner that only 40% of the salary and interest should be allocated for the purpose of arriving at the share income of the partners. On the above facts, the following question has been referred to this court: " Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in upholding the Appellate Assistant Commissioner's decision that only 40% of the salary and interest should be allocated for the purposes of arriving at the share income to be assessed in the hands of the partners ?" Under section 40(b) of the Income-tax Act it is provided that in the case of any firm any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm shall n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the firm as Rs. 25,398. The total of the amounts thus arrived at under section 67(1)(c) amounted to Rs. 58,580. According to the Commissioner of Income-tax, the petitioner before us, the computation has been done correctly under section 67(1)(c) by the Income-tax Officer. The contention of the respondents is that the total income of the firm for the purposes of section 67 is Rs. 23,394, i.e., 40% of the total income of the firm. It is their further contention that while allocating the share of the loss of each of the partner under section 67(1)(c) 70% of the loss of the firm should be deducted from 70% of the interest paid to Shri M.L. Malpani ; similarly 30% of the loss should be deducted from 30% of the salary and interest paid to Shri M. L. Malpani and the share income allocated to him should be Rs. 10,147. Thus, according to them, the total income of the firm computed under rule 8, i.e., Rs. 23,394, should be allocated to the partners after deducting their shares of the loss. This is what the Tribunal has done. In Mathew Abraham v. Commissioner of Income-tax [1964] 51 ITR 467 (Mad) the assessee was the managing partner of a firm which carried on the manufacture and sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain relation between persons, the product of agreement to share the profits of a business. ' Firm ' is a collective noun, a compendious expression to designate an entity, not a person. In income-tax law a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that since a contract of employment requires two distinct persons, viz., the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. So that any agreement for remuneration of a partner for taking part in the conduct of the business must be regarded as portion of the profits being made over as a reward for the human capital brought in. Section 13 of the Partnership Act brings into focus this basis of partnership business." This legal position, it was observed, expresses itself in the Income-tax Act in section 10(4)(b) and section 16(1)(b). The real nature of a salary paid to a partner was held to represent a special share of the profits and is, therefore, part of the profits taxable as such. It was further observed that the salaries paid to partners are regarded by the Income-tax Act as retaining the charac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debtor or the creditor of his co-partners, but he cannot be either debtor or creditor of the firm of which he is himself a member, nor can he be employed by his firm, for a man cannot be his own employer." was approved and it was observed that the Indian law of partnership is substantially the same. It was held that a partnership is only the collective name of separate persons and not a legal person in itself and that, therefore, the salary paid to a partner from the firm is in reality a mode of division of the firm's profits since no person can be his own servant in law, as a contract of service postulates two different persons. It was further held that on account of the method of computation prescribed in the Income-tax Act, 60% of the income of the firm is agricultural in character and, therefore, it cannot be taxed under the Income-tax Act, that even though the flexible arrangement among partners regarding distribution of this sum may take different forms, the essential agricultural character and the consequent immunity from tax cannot be lost simply because it is called salary. The following passage from The Law of Income-tax by A. C. Sampath Iyengar, 6th edition, 1973, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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